14 December 2011

Gold Caught in Stampede for US Dollars as Euro Confidence Drains

The latest EU summit has failed again to calm the storm, and this time the Euro is crumbling and Precious Metals are suffering in a perfect storm of US Dollar strength and a dash for liquidity

According to the "Investing 101 textbook", investors holding Gold should be settling back, preparing for a relaxing Christmas break about now. Safe in the knowledge that yet another year of impressive gains is behind them. However this week, the Christmas eggnog in many Gold investors drinks cabinets may have seemed not quite so sweet.

The fact that the unfolding financial crisis in Europe has yet again failed to find resolution at the latest EU summit should be (according to the text books) boosting precious metals. But as Gold has so often demonstrated in the past, it still has the ability to confound.

The reasons for this are twofold. The first is that European leaders really are looking like they are not going to be able to find a solution fast enough to the Euro-zone problem to avert a major train wreck. This has caused investors to really begin run for the Euro exits, and the first port of call is the US dollar. This has really hurt Gold, which over this cyclical bull run for bullion has maintained a negative correlation with the greenback for most of the journey.

The second reason is that a massive dash for liquidity has forced selling of Bullion to raise US dollars, with many European institutions now shut out of US dollar money markets. These two factors have contrived to take gold down as much as $125 per ounce this week.

While Gold has seen forced selling on liquidity crunches, and bouts of US dollar strength before. It has seldom seen them together in such force.

However the Bullion faithful have taken this as a sign that bottom fishing may yield results, and as such physical buying has seen an uplift. On the retail buying side, BullionSupermarket.com, the precious metal shopping comparison site has seen a 20% uplift in traffic over the week as buyers begin to return to physical markets in search of a deal.

The tide will turn once again, and it may well be sooner than many market commentators think.


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